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June 2012

06/28/2012

Without Congressional action before the end of the year, just about everyone, rich and poor alike, will be hit by tax increases. These increases are the result of temporary tax benefits that will expire at the end of 2012.

Just about everyone will be affected in one way or another. The following is a list of the expiring benefits and how taxpayers will be affected. Check the list for items that will apply to you to get an idea of how your taxes will be impacted.

Exemption Phase-Out - Each taxpayer is entitled to a $3,800 (2012) tax exemption (deduction) for him or herself, his or her spouse, and each dependent. Beginning in 2013, a phase-out (reduction) of the exemptions will return for higher income taxpayers. The otherwise allowable exemption amounts will be reduced by 2% for each $2,500 or part of $2,500 ($1,250 for married filing separately) that the taxpayer's AGI exceeds the AGI threshold for the year based on the taxpayer's filing status. The threshold amounts for 2013 have not been announced yet but will be inflation-adjusted amounts from 2009 (the last year when this rule applied). These amounts were $372,700 for married taxpayers filing jointly, $186,350 for married taxpayers filing separately, $331,000 for head of household filers, and $289,300 for single filers. Impact: Higher income families.

Itemized Deduction Phase-Out - Beginning in 2013, higher income taxpayers will again be subject to the phase-out of itemized deductions. Not all itemized deductions are subject to phase-out. The following are the ones subject to phase-out: taxes, interest (except investment interest), charitable contributions, employee job expenses and other miscellaneous itemized deductions (excluding gambling and casualty or theft losses).

If the itemized deductions are subject to the limit, the total of all itemized deductions is reduced by the smaller of: 1) 3% of the amount by which the AGI exceeds the annual limit, or 2) 80% of the itemized deductions that are affected by the limit. The threshold amounts for 2013 have not been announced yet but will be inflation-adjusted amounts from 2009, which were $83,400 for married taxpayers filing separately and $166,800 for all others. Impact: Higher income families who itemize their deductions.

Payroll Tax & Self-Employment Tax - Both the payroll withholding tax and self-employment tax rates have been reduced by 2 percentage points for two years. Payroll FICA withholding will return to 6.2% (up from 4.2%) and self-employment tax will return to 12.4% (up from 10.4%) beginning in 2013. Impact: All working taxpayers.

Long-Term Capital Gains Rates Increase – Taxpayers have enjoyed reduced long-term capital gains rates for several years as a result of the Bush-era tax cuts. However, those reduced rates will return to the higher rates in effect prior to 2003. The table below compares the current long-term capital gains rates to the anticipated rates for 2013 and subsequent years. Taxpayers with unrealized gains in investment property they’ve held for over one year may want to consider selling some or all of those assets in 2012 to lock in the lower long-term capital gains rate on their gains. Impact: All taxpayers with long-term capital gains.

Regular Tax Rates – In addition to lower long-term capital gains rates, the regular marginal tax rates have been declining since 2001. However, without Congressional action, those reduced rates will return to the higher rates that were in effect prior to 2001. The table below compares the current marginal individual tax rates to the anticipated rates for 2013 and subsequent years.

These increased rates will apply to all varieties of ordinary income, including interest, dividends, short-term capital gains, employment income, etc. Marginal tax rates increase as a taxpayer’s overall income increases, taxing the first block of income received at the lowest rate and each subsequent block at ever-increasing rates until the maximum rate is reached. As with assets eligible for the long-term capital gains rates, it may be appropriate for some taxpayers to accelerate ordinary income into 2012 to take advantage of the lower rates. Impact: All taxpayers.